Course Code: FIN444

Course Name: International Finance

Section: 3

Group Assignment 2

Submitted To
Mirza M. Ferdous
Senior Lecturer, Department of Accounting & Finance,
North South University

Submitted By:

ID Name

2021520630 Sarah Marzia

1921019630 Shafayet Raihan Anik

2031761630 Labiba Nawar Saleh

2014265630 Mehjuba Tasniya Tarik

 OVERVIEW OF COMMODITIES PLATFORM

Derivatives Market
Commodities, encompassing tangible goods like grains, oil, and precious metals, form the
backbone of global trade. Platforms dedicated to trading these commodities play a crucial role in
facilitating transactions, bringing together buyers and sellers on a centralized and liquid
marketplace. Widely known as the derivative market, this financial landscape provides participants
with avenues for risk management, speculation, and arbitrage.

Types of Derivative Instruments:

 Futures Contracts: Standardized agreements between two parties to buy or sell an asset at
a predetermined price and date in the future. Traded on exchanges, futures contracts are
utilized for speculation on future price movements.
 Forward Contracts: Similar to futures contracts but negotiated agreements between two
parties. Unlike futures, forward contracts are not standardized and are commonly used for
hedging purposes.
 Options Contracts: Grant the holder the right (but not the obligation) to buy (call option)
or sell (put option) an underlying asset at a predetermined price within a specified time
period. Options are employed for speculation or to protect against potential price
movements.
 Swaps: Financial agreements where two parties exchange cash flows or liabilities based on
predetermined terms. Common types include interest rate swaps, currency swaps, and
commodity swaps. Swaps are used for risk management, altering cash flow profiles, or
speculating on interest rate or currency movements.

Importance of Derivatives
Derivatives play a vital role in international finance by offering participants avenues for risk
management, speculation, and arbitrage. Through derivatives, investors can gain exposure to
various asset classes without direct ownership. This market enhances liquidity, aids in price
discovery, and promotes effective capital allocation, contributing significantly to the dynamism of
international finance.

Commodities Markets
Commodities, as raw and tangible goods, are traded globally through commodities markets. These
markets, facilitated by commodities exchanges, serve as centralized platforms enforcing rules for
standardized commodity contracts and related investment products.
Forces Driving Commodities Markets
The fundamental drivers of commodities markets are the forces of supply and demand.
Fluctuations in supply directly impact demand, leading to changes in prices. Disruptions in supply,
such as health crises affecting livestock, can trigger significant shifts in demand. Global economic
growth and technological advancements also influence commodity prices.

Commodities Trading
Commodities trading involves the buying and selling of contracts for raw materials. While physical
exchange is possible, a significant portion occurs through futures contracts. These contracts enable
participants to lock in future commodity prices, mitigating risk for both buyers and sellers.

Commodities Trading Platforms

Commodity trading platforms are instrumental in facilitating trading activities. These platforms,
operated by financial institutions or self-regulated technology companies, offer features like real-
time market updates, order placement capabilities, risk management tools, and settlement services.
They enhance liquidity, expertise, and transparency in the international commodity trading market.

In conclusion, derivative markets and commodities trading are integral components of the global
financial landscape, providing opportunities for diverse financial strategies and contributing to
market dynamism.

COMMODITY PLATFORMS IN ASIA

Commodity trading forms a cornerstone of the global financial landscape, with distinct exchanges across
Asia contributing significantly to this dynamic market. Notable exchanges such as the Multi Commodity
Exchange of India Limited (MCX) in India, Bursa Malaysia Derivatives Berhad (BMD) in Malaysia, and
the Singapore Exchange (SGX) in Singapore operate under unique regulatory frameworks, offering diverse
features that solidify their positions in the global commodity trading arena.

1. Multi Commodity Exchange of India Limited (MCX), India:

Established in November 2003, MCX is India's largest commodity exchange and the nation's first enlisted
exchange. Pioneering the introduction of options and futures contracts on bullion, base metals, and energy
indices, MCX boasts 548 registered members and 50,228 authorized persons. Its electronic platform ensures
efficient order matching, trade execution, and real-time price dissemination. Regulated by the Securities
and Exchange Board of India (SEBI), MCX spans around 700 cities, trading commodities ranging from
agriculture to precious metals.
2. Bursa Malaysia Derivatives Berhad (BMD), Malaysia:
A product of the 2001 merger between the Kuala Lumpur Stock Exchange and the derivatives exchange,
BMD stands out for its Crude Palm Oil (CPO) futures contracts. Regulated by the Securities Commission
Malaysia (SC), BMD is primarily focused on commodity derivatives, trading futures contracts for palm oil,
crude oil, rubber, and gold. Its electronic trading platform ensures efficiency and transparency, with strict
adherence to standardized trading and settlement processes.

3. Singapore Exchange (SGX), Singapore:

Formed in 1999 through the merger of the Singapore International Monetary Exchange (SIMEX) and the
stock exchange (SES), SGX is a major hub for financial instruments. Offering a wide range of products,
including equity index futures, options, and commodities derivatives, SGX's operations are characterized
by its geographical location, diverse product portfolio, regional focus, and robust regulatory environment.
The Singapore Exchange Derivatives Clearing Limited (SGX-DC) ensures financial integrity, risk control,
and efficient settlement procedures, with a strong emphasis on technology innovation overseen by the
Monetary Authority of Singapore (MAS).

Commodity Trading in India and China:

In India, commodity trading is regulated by SEBI, with the Commodity Derivatives Market Regulation
Department (CDMRD) overseeing operations. Trading in spot and futures markets involves stock
exchanges serving as intermediaries, and brokers play a crucial role in managing risk and facilitating
transactions.

In China, commodity trading takes place on exchanges such as the Shanghai Futures Exchange (SHFE) and
Zhengzhou Commodity Exchange (ZCE). Government measures regulate prices and maintain market
stability, with state-owned enterprises (SOEs) playing vital roles in production, import-export, and
domestic distribution. China's commodity trading encompasses spot and futures transactions, involving
producers, consumers, traders, and speculators. The presence of SOEs underscores the influence of
government policies on commodity markets.

Additional Asian Commodities Exchanges:

4. Tokyo Commodity Exchange (TOCOM), Japan:

Established in 1984, TOCOM is a major commodities exchange based in Tokyo, Japan. Specializing in
futures contracts for precious metals, energy resources, and agricultural products, TOCOM serves as a key
player in the Japanese commodities market, offering a platform for hedging and price discovery.

5. Korea Exchange (KRX), South Korea:

KRX, headquartered in Busan and Seoul, South Korea, is a comprehensive financial marketplace with a
commodities division. Established in 2005, KRX facilitates futures and options trading for commodities
such as gold, copper, and agricultural products, contributing significantly to the development of South
Korea's financial markets.

6. National Commodity and Derivatives Exchange (NCDEX), India

In addition to MCX, NCDEX is another major commodities exchange in India. Established in 2003,
NCDEX specializes in agricultural commodities, offering futures contracts for products like soybeans,
cotton, chana (gram), and guar. Regulated by SEBI, NCDEX provides a platform for price discovery, risk
management, and trading in the Indian agricultural commodities market.

7. Thailand Futures Exchange (TFEX), Thailand

Established in 2004, TFEX is Thailand's derivatives exchange, providing futures and options contracts on
various asset classes, including commodities. Playing a crucial role in Thailand's financial market, TFEX
allows investors to manage risk and speculate on commodity price movements.

Commodity trading across these diverse Asian exchanges involves a wide array of products, reflecting the
economic activities and resources of each country. Regulatory oversight from SEBI, SC, MAS, and other
governing bodies ensures market integrity and investor protection. The role of state-owned enterprises
(SOEs) in China emphasizes the significant influence of government policies on shaping commodity
markets.

The emphasis on technology innovation, electronic trading platforms, and data analytics, seen in exchanges
like SGX and BMD, underscores continuous efforts to enhance efficiency and transparency in commodity
trading across the region. The presence of various exchanges highlights the diverse economic landscapes
of Asian countries and their crucial roles in the global commodities market.

Bashundhara Group’s Acquisition of Chittagong Stock Exchange

(CSE)

For the first time in Bangladesh's capital market history, ABG Limited, a subsidiary of the
prominent Bashundhara Group, has marked a significant milestone by becoming a strategic partner
of the Chittagong Stock Exchange (CSE). The agreement, signed on November 20, 2022, signifies
the private sector's firm commitment and confidence, with ABG Limited acquiring a substantial
25% stake in CSE.
Financial Details
ABG Limited, with a paid-up capital of Tk 5 crore and a total of 50 lakhs shares, is set to acquire
this 25% stake at Tk 15 per share, amounting to approximately Tk 240 crore. Anvir, the majority
shareholder, currently owns 49,99,999 shares of the total.

Strategic Implications
As part of the strategic partnership, ABG Limited will take charge of the bourse's technical
innovations, heralding a new era for the country's capital market. The collaboration with a US-
based firm for technical assistance emphasizes a forward-looking approach to managing the stock
exchange efficiently.

Demutualization Process and Regulatory Approval

Under the Demutualization Act of 2013, members received 40% of CSE's shares, while 60%
remained in a blocked account. In the demutualization process, the CSE's plan to sell its 25%
ownership to ABG Limited received conditional approval from the securities regulator on
September 28, 2022.

Contributions to Development
According to CSE Chairman Asif Ibrahim, the partnership between CSE and ABG Limited is
poised to contribute significantly to the country's development. This collaboration is seen as a
pivotal step that will enrich the capital market, creating opportunities for expansion and talent
utilization.

The Bashundhara Group's Strategic Move

The Bashundhara Group, a conglomerate with diverse holdings, has strategically entered the
financial sector by acquiring a 25% stake in CSE for Tk 238 crore. This move aligns with the
group's portfolio strategy, aiming for diversification and expanding its influence in the growing
capital markets.

Factors Influencing the Acquisition

Several factors have motivated Bashundhara Group's decision to invest in CSE:
 Portfolio Strategy: Diversification of business portfolios to include dynamic and growing
capital markets.
 Large Market Presence: Access to a wider range of investors and increased liquidity
compared to other stock exchanges.
  Long-Term Growth: Anticipation of the future growth of the Bangladeshi capital market
driven by factors such as rising incomes, growing financial awareness, and expanding
investment opportunities.

Potential Impact of the Acquisition

The acquisition holds great potential to:
 Attract New Investors: Increase market liquidity and raise capital for businesses seeking
funds.
 Modernize Infrastructure: Rapidly improve CSE's infrastructure, technology, and
operational capabilities.
 International Linkages: Potentially lead to regional stock exchanges' linkages, opening up
new international investment opportunities for Bangladeshi investors and businesses.

The strategic partnership between Bashundhara Group and Chittagong Stock Exchange represents
a pivotal moment in Bangladesh's capital market evolution. With the infusion of expertise and
resources, this collaboration is expected to reshape the landscape, instilling confidence in the
market's growth potential and reinforcing the strength of Bangladesh's capital market.
 Advantages of commodities platform
Derivatives Market:
The derivatives market plays a crucial role in managing market uncertainty, providing participants
with a diverse range of investment opportunities. Derivatives traders often engage in offsetting,
straddle, and swap strategies with minimal investments, fostering increased individual
participation.
A robust derivatives market acts as an economic indicator, attracting foreign investments and
enhancing Bangladesh's foreign currency reserves. This market facilitates access to previously
inaccessible markets, allowing institutions to capitalize on favorable rate differences through
interest rate swaps, thereby mitigating interest rate risks for banks.
Furthermore, derivatives empower banks to match risk management requirements for non-
financial and financial clients, fostering increased lending volume. This contributes positively to
the expansion of enterprises across the economy, stimulating overall economic growth.
Non-financial institutions can harness the derivatives market to manage cash flow fluctuations,
reducing underinvestment risks due to volatile commodity and equity prices, exchange rates, and
interest rates.
Price discovery, a key benefit of the derivatives market, assists in extrapolating future prices,
benefiting investors, financial institutions, and local farmers. It breaks syndicates controlling
agricultural sectors, ensuring fair compensation for farmers and managing price fluctuations.
The initiation of a derivatives market not only diversifies risks but also stimulates economic
growth by creating more opportunities, reducing dependence on the capital market.

Commodities Trading Platform:

Introducing a Commodities Trading Platform in Bangladesh brings numerous advantages:

 Price Assurance for Sellers: Through futures and forward contracts, sellers, especially
farmers, can secure and set prices for their goods, providing price assurance and reducing
uncertainty.
 Mitigating Price Fluctuations: Forward contracts, futures contracts, and options act as risk
management tools, mitigating extreme price drops and inconsistent commodity price
movements, stabilizing prices for buyers and sellers.
 Reduced Basis Risk: While futures contracts introduce basis risk, the exchange helps
manage it, contributing to fair pricing practices and replacing price risk with a more
manageable form.
  Market Transparency: Centralizing trade ensures market transparency, offering real-time
pricing information. Informed decisions based on actual supply and demand dynamics
contribute to fair pricing.
 Hedging: Risk management tools like futures contracts and options enable producers,
consumers, and traders to hedge against price volatility, ensuring stability in operations
and fair market conditions.
 Access to Funds without Interest: The exchange increases liquidity for farmers, allowing
access to funds without incurring interest, supporting fair pricing and financial support for
producers.
 Reduced Transaction Costs: Centralizing commodities trading through the exchange
reduces transaction costs by identifying market outlets, inspecting product quality, and
connecting buyers and sellers.

In conclusion, the integration of advanced derivatives and a Commodities Trading Platform in

Bangladesh not only fosters a fair and stable market environment but also serves as a catalyst for
economic growth by attracting investments, empowering businesses, and supporting the
livelihoods of local farmers.

Disadvantages of Commodity Trading Platform

Challenges in Agriculture Sector:
The agricultural sector in Bangladesh faces numerous challenges that could impede the successful
establishment of a commodities trading platform. These include inadequate infrastructure for
efficient marketing, limited market access, policy incoherence, credit constraints for smallholder
farmers, climate risks, and reliance on informal marketing systems. Overcoming these challenges
is crucial for fostering a conducive environment for commodities trading.

Disadvantages of Commodities Trading Platforms:

Commodities trading platforms, while advantageous, come with inherent disadvantages that need
addressing. These include market volatility, speculative risks, dependency on external factors, lack
of awareness, infrastructure challenges, regulatory hurdles, impact on traditional markets, financial
risks, ethical concerns, and potential repercussions on food security. Policymakers and market
participants must proactively address these drawbacks to ensure the responsible development of
commodities trading in Bangladesh.
 Regulatory Framework: Bangladesh lacks a clear regulatory framework for commodities
trading platforms, necessitating the creation or amendment of regulations tailored to the
unique features of this market.
  Lack of Knowledge: Limited awareness and understanding among market participants
about commodities trading underline the need for educational campaigns and capacity-
building initiatives to enhance financial literacy.
 Infrastructure Limitations: Bangladesh faces infrastructure challenges, including
inadequate warehousing facilities, limited internet access, and power outages. Innovations
in warehousing, logistics, and improvements in internet accessibility and power supply are
essential to address these limitations.
 Price Volatility and Market Manipulation: The inherent volatility of commodities markets
and the risk of market manipulation require robust price discovery mechanisms,
surveillance systems, and preventive measures to ensure a fair and transparent trading
environment.

Conclusion

The introduction of a commodity exchange market in Bangladesh presents a new avenue of

opportunities for farmers and producers. This market has the potential to address the recurring
financial losses they encounter annually due to imbalances in supply and demand, especially
during peak seasons. By engaging in this exchange market, these stakeholders can benefit from
advanced price signals, aiding sellers (farmers/producers) and facilitating buyers (consumers) in
securing financing for commodities across different seasons. The prospect of future selling
opportunities serves as an incentive for farmers and producers to provide high-quality commodities
to meet buyer demands. An examination of neighboring countries, including India, Nepal, and
Pakistan, reveals their positive contributions to the economy through well-performing commodity
exchange markets. Challenges such as a lack of infrastructure facilities, inadequate awareness
among stakeholders, and regulatory weaknesses have hindered expected benefits in some
instances. However, despite various challenges, it is evident from the study that commodity
exchange markets have the potential to make significant positive contributions to the economy.
Even in cases where these markets were less successful, the underlying reasons are manageable.
Although the commodity exchange market in Bangladesh is in its early stages, the country
possesses expert resources with experience in establishing such markets in neighboring countries
like Myanmar and participating in the operations of successful markets in countries like India. This
suggests a strong possibility of successfully implementing commodity exchange markets in
Bangladesh, ultimately benefiting a large group of participants.